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Article: Second Circuit Rejects Massive Class Action Settlement and Affirms Importance of Adequate Representation and Due Process Rights for Absent Class Members

September 01, 2016
Business Litigation Reports

The Second Circuit Court of Appeals recently considered whether the largest negotiated cash settlement in a class action antitrust case satisfied the Federal Rules of Civil Procedure and constitutional due process concerns and determined, in a rare decision, that the answer was “no.” In a nod to the rights of absent class members, the Court unanimously overturned a multi-billion dollar settlement relating to credit card swipe fees, reopening litigation in a case that had been pending for nearly a decade. See In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation (“Interchange Fee Antitrust Litig.”), Case No. 12-4671, 827 F.3d 223 (2d Cir. June 30, 2016). The Court’s decision, in which Quinn Emanuel represented a merchant who objected to the settlement, affirms long- standing principles of due process and the principle that global peace in complex commercial litigation cannot come at the expense of procedural and substantive fairness to absent class members.

In 2005, several class action suits were filed against Visa and MasterCard, and their member banks, alleging that Visa and MasterCard charged supracompetitive credit card fees and imposed rules that suppressed competition over the routing networks used to process the credit card transactions between the merchants, the acquirer bank, and the issuer bank. The cases were consolidated before Judge Gleeson in the Eastern District of New York. After several years of litigation, while motions for summary judgment and class certification were pending, the parties reached a preliminary settlement. The district court ultimately approved the settlement, which created two nation-wide classes, covering nearly 12 million merchants: one class was approved for injunctive relief pursuant to Rule 23(b)(2) of the Federal Rules of Civil Procedure, and another damages class was approved pursuant to Rule 23(b)(3). In re Payment Card Interchange Fee and Merchant Discount Antitrust Litig., 986 F. Supp. 2d 207 (E.D.N.Y. 2013). The Rule 23(b)(3) class comprised merchants that accepted Visa or MasterCard-branded credit cards from January 1, 2004 to November 28, 2012, and was entitled to receive damages from a fund of up to $7.25 billion (before deductions were made for opt-out plaintiffs). The Rule 23(b)(2) class, which included all existing and future businesses, was entitled to injunctive relief consisting of rule changes to Visa and MasterCard’s rules, including, most significantly, the right to surcharge where allowed by state law and by other networks. Importantly, although merchants could opt-out of the damages class, merchants could not opt-out of the injunction class. Significantly, the injunction class settlement also involved a complete release of any future claims arising from or relating to interchange rules, interchange fees, merchant fees, or many of the rules at issue in the litigation, including rules related to payment card acceptance, surcharging, and anti-steering rules. Interchange Fee Antitrust Litig., 827 F.3d at 230 (describing terms of release).

A coalition of merchants objected to the settlement because the class did not meet the requirements under Rule 23 of the Federal Rules of Civil Procedure for class certification and violated class members’ Due Process rights by extinguishing class members’ individualized claims for money damages without providing opt-out rights. Specifically, merchants argued that the injunction class lacked the required cohesion of interest required by the Federal Rules, and that certain class members did not receive adequate representation. Objectors also argued that the district court exceeded its authority by settling future claims that were beyond the scope of the litigation and not yet ripe. The class plaintiffs, in supporting the settlement, argued that the court should consider the adequacy of the settlement as a whole, including the damages class, which was the largest cash relief in an antitrust class action settlement and the third largest class action settlement. The class plaintiffs also argued that the injunctive relief provided by the settlement provided valuable relief because the right to surcharge, in certain instances, allowed merchants to educate consumers on the cost of accepting credit cards, steer consumers to less-expensive routing methods, and pass along interchange fees. Because the injunction offered meaningful relief, class plaintiffs argued, the release was reasonable and lawful. Visa, MasterCard, and the other defendants also argued that the settlement was fair and that the release was permissible.

The Second Circuit rejected those arguments, holding that certain members in the injunction class were inadequately represented in violation of Fed. R. Civ. P. 24(a)(4) and that the settlement violated class members’ Due Process rights. Writing in concurrence, Judge Leval noted that “[t]his is not a settlement; it is a confiscation.” Interchange Fee Antitrust Litig., 827 F.3d at 241 (Leval, J., concurring). The Second Circuit noted that adequacy of representation must be “determined independently of the general fairness review of the settlement,” id. at 232 (quoting Denney v. Deutsche Bank AG, 443 F.3d 253, 268 (2d Cir. 2006)), and that the “focus of the Rule 23(a) inquiry remains on ‘inequality and potential inequity at the precertification stage.’” Id. (quoting Ortiz v. Fibreboard Corp., 527 U.S. 815, 858 (1999)). The Second Circuit found that a class including both present and future claimants created conflicts that required “structural protection,” that could not be overcome even through the settlement “‘was the product of an intense, protected, adversarial mediation involving multiple parties,’ including ‘highly respected and capable’ mediators and associational plaintiffs.” Id. at 232-35.

The Second Circuit noted that the members’ inability to opt-out further exacerbated the problem of inadequate representation, id. at 234, and violated the Due Process rights of any class member that could not take advantage of the injunctive relief, such as those merchants that (i) accepted payment cards with a most-favored nation provision that prohibited surcharging, such as American Express, (ii) operated in a state that prohibited surcharging, or (iii) came into existence after July 20, 2021 and could neither obtain the benefit of surcharging nor bring suit against Visa or MasterCard. Id. at 236-40.

Although the settlement resolved over a decade of litigation, the “benefits of litigation peace do not outweigh class members’ due process right to adequate representation,” id. at 240, and global peace cannot be obtained at the expense of absent class members’ rights. The case is now back in the district court.